The Ontario Liberal government's $224-million loan to the struggling MaRS research tower could be seen as a "bailout" of the Toronto innovation hub's second phase, according to the province's Auditor-General who laid bare a litany of other problems with the project.

"There was a lack of transparency surrounding the government's support for its research and innovation agenda through this loan," Auditor-General Bonnie Lysyk wrote in her annual report, released Tuesday. "The lack of transparency regarding the policy objectives and outcomes to be achieved from this loan creates the perception that this transaction was a 'bailout' of a non-government organization."

Ms. Lysyk's investigation of the Medical and Related Science (MaRS) loan comes as the province prepares to announce Wednesday that it has a slew of tenants lined up to fill the near-empty tower. This would make it possible for MaRS to pay back the loan in full, said Brad Duguid, the Minister of Economic Development, Employment and Infrastructure.

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Gord Nixon, the chair of the board of directors for MaRS, told reporters Tuesday that it has letters of intent to lease from private-sector companies and not-for-profit organizations that would fill 65 per cent of the building; other prospects are in advanced negotiations. Mr. Duguid is also set to release the advice of a pair of real estate experts Wednesday who were asked to weigh in on the future of the 20-storey tower.

The Auditor-General's report revealed several issues with the loan to MaRS.

When Infrastructure Ontario, the government agency that made the loan, approved the outlay to MaRS Phase 2 Inc. (a subsidiary of the main MaRS operation created to oversee the new tower) in May, 2010, it required that MaRS pre-lease 80 per cent of the building at $29 a square foot before the loan money cold flow.

A year later, MaRS was "still nowhere near," the 80-per-cent threshold, even though the main MaRS entity had offered to take on 15 per cent of the space in the new building itself.

Despite the lack of tenants, another part of the government – the Ministry of Research and Innovation – stepped in and offered to guarantee the loan so that construction of the previously stalled project could resume.

The Ministry of Research and Innovation's debt-service guarantee has a cap of $7.1-million a year for 15 years, but that is not enough to cover the loan obligations for MaRS Phase 2, Ms. Lysyk revealed.

Interest payments on the loan will total $8-million for this year and $14.6-million for 2015 and beyond, meaning, "the loan is still at risk of default," according to the report.

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When IO approved the loan, only two tenants had signed leases: Public Health Ontario and the Ontario Institute of Cancer Research, both of which are largely funded by the provincial government.

They signed leases at MaRS Phase 2 that were well above market rates. "Since both organizations receive the majority of their funding from the government of Ontario, the additional rent over market prices would in effect be a subsidy in support of the government's medical research agenda and the MaRS vision," Ms. Lysyk wrote. The subsidy to PHO, whose main laboratory will be located at MaRS, is at least $7-million over the 25-year life of the lease.

"[The Liberals] should never have started the construction of phase two without a proper business plan," said Jim Wilson, the interim leader of the Progressive Conservative party. "And then when they did, it should have been a transparent process for all to see."

The troubles at the MaRS building were kept quiet until this year's provincial election campaign, when the PCs leaked documents that revealed the Liberal government was considering buying the building and filling it with bureaucrats, a move that would have flown in the face of MaRS's original purpose. The organization was founded in 2000 by a group of scientists and entrepreneurs who envisioned MaRS as a venue for uniting scientists and businesspeople in the common goal of commercializing discoveries made at the city's hospitals and universities.

In September of this year, the government announced a $309-million conditional agreement to buy out an American developer's stake in the MaRS tower and take over the Infrastructure Ontario loan. MaRS representatives and Mr. Duguid have said repeatedly that the American developer demanded lease rates too high to attract tenants.

Once the American developer is officially out of the way, MaRS can lower the rents, seal deals with its prospective tenants and pay back the money lent to it by taxpayers, Mr. Nixon said.